October 31, 2010

Bernanke's Credibility

Over the past few years the United States economy has been in turmoil. After the housing market crashed and unemployment rose, America fell into a deep recession that is not similar to any other issue the country has faced in over fifty years. To help solve this issue an economist with an expertise in The Great Depression, Ben Bernanke was hired to head the Federal Reserve. Up to this point people have been highly skeptical on whether some of his tactics have truly helped bring the United States out of the recession.

Bernanke has recently been reelected to serve another four year term at the head of the Reserve, and he soon plans to take new measures at putting a stop to the crisis. Many news organizations and media outlets are considering these up in coming tasks to be crucial to Bernanke’s credibility and legacy. In the article from the Washington Post by Neil Irwin he explains some of Bernanke’s plans and how it could either propel the economy upward, as hoped, or send it spirally back down into a further recession with higher unemployment, less consumer spending, and bad inflation. The economic crisis is primarily seen as a macro issue in the article, but towards the end of the article Irwin explains how consumer spending and individual firms will be an essential part of Bernanke’s plans. Irwin surprises me when he explains that expectations play a big role in the way consumers invest in product or choose to save in fear of a troubled future. He explains that these positive expectations have improved the stock market, and encouraged spending from both individuals and firms.

Irwin continues with his analysis of expectations and consumer assumptions, by underlining the idea that if there is a lack of confidence, then people will be weary to invest and spend even with lower interest rates. If this is the case, then Bernanke’s plan $50 trillion worth of bonds would prove to be uneventful and leave consumers scratching their heads and most likely calling for less government inference. Irwin continues on the path as he explains this skittishness of investors, but to me he fails to rope in the economic reasoning behind people’s expectations relies more on common sense compared to true economic analysis.


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